Do you remember when Hewlett-Packard (HPQ) acquired Palm for $1bn in 2010, likely just prior to Palm going bankrupt after several years of falling sales. I remember the headline crossing and thinking to myself, “What in the world can HP extrapolate from the Palm supposed assets”?The reality came to fruition in short order as there was simply nothing of value to be had in the Palm assets, which were not competitive in the smartphone industry any longer. Why management teams make such frivolous decisions to acquire a failed, not failing, but absolutely failed brand and product is beyond my ability to rationalize. Nothing ever came from the Palm acquisition and since that time Hewlett-Packard has split into two separate entities. A billion dollars…gone, wasted and all the while countless investors were told the Palm assets had considerable synergies and value to the Hewlett Packard business that was. It’s for this reason I author this article to further discuss the recent Fitbit (FIT) acquisition of certain Pebble “assets”. 

We can fast-forward from the Palm acquisition and see the very same deals done or being done today.Bed Bath & Beyond’s (BBBY) recent acquisition of the failing One King’s Lane brand and online home goods business. One King’s Lane once held a billion dollar valuation only a couple short years ago and before needing to raise more capital. But with their sales dramatically falling YOY their valuation got cut just as dramatically. The company attempted to sell itself for over $100mm but had no takers. Finally, Bed Bath & Beyond came into the picture and acquired the failing company for pennies on the dollar or what some have reported to be around $30mm. A once billion dollar valuation was acquired for some $30mm…and why? There really isn’t a whole lot of logic to the acquisition from Bed Bath & Beyond as One King’s Lane was on the verge of bankruptcy and had slashed its workforce in half with more cuts to come. These smaller companies always hold several rounds of capital raising namely A-round, B-round and so forth. I would venture to guess that at some point over the last couple of years, Bed Bath & Beyond invested in one of these rounds and now found it far more appropriate to acquire One King’s Lane than to take charges against the investment, as insignificant as it may have been. While Bed Bath & Beyond has touted the acquisition as synergistic and value added over the long haul, that mantra has been the mainstay for many a failed acquisitions year-after-year-after-year.

So here we are only a few short months post the Bed Bath & Beyond activity and we find Fitbit acquiring…yep, another failing brand and business. Fitbit acquired the struggling, failing and found wanting Pebble. Because the Pebble smartwatch hardware products were found with having no value to Fitbit, the acquisition was touted to center on personnel and intellectual property. The price of the acquisition was also speculated to be around $40mm and not to include Pebble’s debt.  If you are wondering what would have happened to Pebble shy of an acquisition, the likelihood of a bankruptcy was high. Sales for Pebble were tumbling and rumor had it that Best Buy (BBY) was discontinuing its listing of Pebble products due to “failure to deliver” and charge back inefficiencies that maligned the relationship. Target (TGT) was also likely to discontinue carrying Pebble offerings. “Why not just let the company go bankrupt then, eliminate some level of competition if you are Fitbit”?While that sounds completely logical, keep in mind the category of wearables is under great scrutiny given Fitbit’s shortcomings as the largest player in the wearables category. Fitbit desires to maintain the category's presence at retail outlets and by acquiring Pebble they can, in some ways, maintain the presence by eliminating the Pebble brand and supplanting it with the Fitbit brand and products. It’s a $40mm ploy, an effort of sorts to keep a struggling category presence post-market saturation and while other products in the category are also being discontinued like the Microsoft Band and Jawbone products. More discontinuations will come, make no mistake in that regard. But in the wake of further discontinuations will be a stronger brand-product association offered by Fitbit going forward. 

Pebble is worthless in reality and I wouldn’t be swayed by Fitbit’s CEO suggesting the acquisition will help with its efforts in the digital health arena.The 40 or so engineers also acquired are of little relevance to the business model or the ability to reignite long-term revenue growth for Fitbit. These same engineers would have been looking for employment if Pebble were left to its own fate. There is no logic here, but rather a litany of Fitbit's management errors with regard to investment and use of investor funds. Management thought they could achieve higher revenue and earnings growth in 2016 and were found in error as they have been found in error for much of their public existence as a company. Pebble, with its smartwatch technology and IP found itself in the precarious position of developing and distributing a product of little use to the consumer, based on sales for the smartwatch category. But here comes Fitbit suggesting smartwatch technology, failing and failing mightily, has a value to Fitbit. I harken back to the Hewlett Packard example noted above.

With regards to the Fitbit acquisition of Pebble, Seeking Alpha author Donovan Jones offers the following commentary:

Whatever the price paid, the main benefit to Fitbit is that it gains a large group of knowledgeable developers in one single transaction, which will help it to reduce its time to market in the increasingly competitive wearables market.

FIT's financial performance has been unimpressive lately, as it recently missed Q3 expectations and lowered its forward revenue growth forecasts.

Its competitors in the consumer fitness space are large and actively moving forward with new product development:

•Apple (NASDAQ:AAPL)

•Samsung (005930.KS)

•Garmin (NASDAQ:GRMN)

•Jawbone

•Jaybird

•Misfit

Donovan Jones offers the opinion that speed to market with product offerings is enhanced by the acquisition of PebblePebble-related logics and personnel.For such an opinion I suggest, “Who cares how fast Fitbit delivers a new smartwatch or new hardware laden wearable in a market that is by all accounts saturated and on the verge of categorical declines”? Speed to market is of little consequence at this point. What is critical is the need for Fitbit to diversify its product offerings beyond the wearables category. In no way does a Pebble acquisition offer such diversification. I say that with respect to the next 12-18 months where Fitbit will be challenged to show revenue and/or earnings growth.  My comments have no consideration to the firm’s stock or stock valuation. 

Moreover, Donovan Jones offers the need to move quickly because competing brands are doing so. The statement is dubious at best as Misfit was failing on the same level as Pebble and recently acquired by Fossil (FOSL). Jawbone all but filed bankruptcy as the company has been liquidating its inventory of wearables for several quarters now.Jaybird…don’t get me started!Apple…how bad have Apple Watch sales been and as I’ve been forecasting since earlier this year? In the Q3 2016 period, IDC reported Apple Watch shipment declines on the order of 55 percent. Samsung has bigger fish to fry as the company has found smartwatches less in demand than hoped for since 2013 when it launched its first generation smartwatch. No, nobody in the wearable space is moving quickly as the category has clearly been in consolidation due to poor sales and widely lowered forecasts for the category.Did I forget to mention the Nokia acquisition of Withings? I wouldn’t be surprised to see Garmin (GRMN), not mentioned by Mr. Jones although number 2 or 3 in smartwatch sales YOY, consolidate its product offerings in the coming 12-24 months due to a lack of demand. 

Moreover, Mr. Jones offers the following regarding Fitbit’s Pebble acquisition as facilitating Fitbits digital health initiatives:

The addition of a true digital health offering will no doubt be an important future growth potential for the company; the acquisition will presumably throw more engineering resources at the greater technical challenges inherent in digital health-intensive applications.

The so-called digital health transformation offered by Fitbit’s CEO comes with absolutely no orientation of value from the proposition. Why? Well because Fitbit has already found the initiatives regarding digital health to be difficult and nowhere near as lucrative as its existing consumer goods business. Fitbit is not a medical device company and adding layers of digital-focused software and technologies does not open you up to ancillary markets that can even bridge the gap in net sales declines from their consumer goods business. Kind of like their corporate wellness focused-business isn’t able to offset any consumer goods business shortcomings. What’s worse is that Fitbit’s CEO knows this all too well, which is why he literally leaves investors with little if any details surrounding the company’s digital health transformation. No value orientation, no step-by-step plans, no color on products for such a transformation…nothing.James Park is fully aware that the consumer market is the largest addressable market in the world and anything else is of lesser quantity and quality.“Digital health…stop it”! 

And then there is the recent partnership with Medtronic (MDT). Don't get your hopes up here folks. Remember, Target licenses the Starbucks (SBUX) brand, trademark and operating systems in all of their 1,800+ stores nationwide. And that is basically what is likely happening here between Fitbit and Medtronic. More than likely, Medtronic is simply licensing the Fitbit platform to be used by its customers and patients for healthcare-related purposes. Fitbit gets exposure and a nominal licensing fee, but nothing of consequence related to revenues. 

Prior to Fitbit releasing Q3 results that missed certain of analysts revenue estimates and found the company lowering FY16 guidance, I offered the following in an article titled “Fitbit Q3 2016 Earnings Preview”. 

In 2015, Fitbit grew revenues 92%, but in 2016 the company is only expected to grow revenues roughly 40 percent. While 40% revenue growth is a great expectation and end-result, in 2017 the company is only expected to grow revenues some 16 percent (revised lower from 17%). Having said that, with each successive quarterly achievement in distribution gains, it becomes increasingly unlikely that Fitbit will achieve 16% revenue growth in 2017.

As I assumed, the company will not achieve 16% revenue growth in 2017. Analysts have cut their revenue estimates mightily for 2017 to where the average analyst estimate exhibits just 3.7% revenue growth. 

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If you want my opinion on whether or not Fitbit can achieve this expectation; I would be very surprised to see them do so.I don’t see where that growth will come from given the lack of demand that currently maligns the holiday shopping season with regards to Fitbit products. I’m skeptical that the company will come through Q4 2016 with clean retail inventories. As such, the Q1 2017 replenishment cycle may be worse than presently modeled by analysts. Additionally, when retail buyers find inventory levels sufficient to last through Q1 and possibly Q2, orders placed will be fewer than in the previous year. This remains to be seen.

For a company that will likely see poor sales in 2017 and earnings cut in half I would expect more thoughtful capital spending. Nonetheless, here we are with Fitbit yet to offer investors the consideration of possibly streamlining efforts to right-size the business around lesser demand and gross margin contraction. Having said that, the company may offer such commentary in 2017 when they release Q4 2016 and FY16 results alongside FY17 guidance.